Main Points

With the sharp crop failure, 21/22 will have the lowest ethanol production in the last 3 years.
The result is tight carryover stock, which will support high prices.
However, the risk of filling and reducing the gasoline blend remains latent

Starting from the end

Dropping our crop review, we moved our ethanol estimate to 26.9bn liters – including corn ethanol.
This represents a reduction of almost 850m liters compared to previous expectations.
All our assumptions for the revision of the numbers can be found in the report: CS Brasil: 32.5mmt of Sugar.

Supply

With the parity at the pumps favoring gasoline, the focus in this crop has been the production of anhydrous, contrary to what has been seen in the last 3 years.
Although the beginning of the crop favored the production of hydrous, we started to see the change to anhydrous as of May.
This production behavior was driven by higher anhydrous premiums, negotiated both in contracts and in spot sales, as well as by the migration of consumer preference to gasoline – more on this in the next session.

But overall, ethanol production is the lowest in 3 years.
With last week’s crop review, ethanol supply has shrunk by 850m liters.
The final stock projection at the end of March is the lowest expected in the decade.

Demand

Although the pandemic is not over, people are slowly returning to normalcy.
This is reflected in the recovery in fuel consumption, which is trying to return to pre-pandemic levels.
In the cumulative from January to June (data for July have not yet been released), consumption grew 6% p.a.

Despite the recovery, ethanol demand remains well below 2019 levels.
Year-to-date, reported hydrous fuel sales are 1.5bn liters below 2019.
Understandable since the parity on pumps has remained persistently above 70% since April.
In fact, the current levels of parity at 75% are the highest recorded in the decade.

The share of hydrous in total demand is the lowest since 2017.
The trend is for it to remain this way for the next few months, reaching 25%.

Ending balance

Despite the reduction in expected demand for hydrous, this does not mean a negative outlook for prices in the off-season.
As we’ve already said, ethanol stocks should be the tightest in the decade, contributing to maintain current levels.
Furthermore, despite the recent drop in oil prices, the high price of gasoline at the refinery contributes to supporting ethanol prices.

Another concern that we have seen a lot is the questioning of maintaining the blend of anhydrous in gasoline at 27%.
With the current forecast for the coming months both for total fuel demand and for the participation of hydrous, we believe that, despite the tight stocks at the end of March, it will be enough to reach what is required by the ANP – but at the limit.
Regarding next year, well this is a discussion for another time…

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Ana Zancaner

Ana graduated from Insper University Sao Paulo in 2013, with a bachelor’s degree in business administration. She joined CZ as an intern in 2013 and is now our senior analyst in our Sao Paulo office. At CZ she is responsible mainly for analysis of the Brazilian sugar and ethanol sector but supporting other consulting requests as well.